Scott Pfeiffer's Business Blog

Category Archives: Featured

“Sometimes you’re the bug, sometimes you’re the windshield”, said my friend Bret Mingo, was we walked down the streets of Annapolis on a beautiful Tuesday night. I was in town to help Bret and his partner, Chris Van deVerg, sort out back office issues for their company Core Communications. We were discussing another friend’s company that had broken up, and it had not gone well.

“The time to negotiate what will happen when you break up is before you get together, or soon thereafter”, Bret opined. “You have to make the deal before you know whether you’re the bug, or the windshield”.

Bret was right. Deals are much tougher to negotiate after everyone knows whether they are the buyer or the seller. Deals are much more difficult to negotiate after you know whether you are the partner left running the business, or the partner whose widowed spouse is left trying to raise the kids.

Life has a way of going in unexpected directions. I think any small business potentially benefits from considering, up front or early on, what will happen in many of the following situations:

One partner wants to leave.

The other partners want one of the partners to go.

One of the partners dies.

One of the partners is disabled, or can’t work for an extended period of time.

One of the partners isn’t pulling their weight.

One of the partners is arrested. Does it matter who the victim is? What the crime is? Does it matter if the person isn’t convicted? What do you do in between arrest and conviction?

One of the partners wants to retire and be bought out.

One partner wants to buy the other partner out.

You want or need to bring a new partner in?

All of these are possible. The answers will depend a lot on the number of partners, the type of business, the corporate form of the business, and relative wealth of the partners, the relative working value of the partners, and a host of other factors.

In order to do this right, the partners will need advice from:

A good accountant – to tell them the tax problems and opportunities

A good business lawyer – to help them write a binding agreement that makes sense and is enforceable

Possibly a good banker – to discuss financing realities of some of their choices

Possibly a good insurance agent – to offer advice on other financing options for some of the issues: like life insurance, disability insurance, and retirement plans

I have seen a lot of bugs get hit by a lot of windshields in the last 20 years of working with entrepreneurs. Bret has too, and I’ll bet any entrepreneur or professional who works with entrepreneurs has seen it more times than they care to recall. It is always painful to see a company destroyed when it didn’t have to be, all because the partners didn’t negotiate a deal before the windshield was flying at one of them. By then, it is often too late.

I was having coffee with a friend and client today, and out of our conversation came a really powerful insight: getting clarity about your dream exit is a powerful tool for an entrepreneur.

I have touched on long-term exit strategy with clients before, and often this leads to thinking about buy-sell agreements or rights of refusal or life insurance funded trusts for my client’s lawyers to create (you’re welcome), but today it was really about envisioning the exit my client wanted, taking a look at what the company had to look like in several years to achieve that, and defining short and medium term concrete goals to get there.

It was exciting.

On of the awesome things about being an entrepreneur is that you are creating your own work life. You really do have the power, at least within the limit of your skills and finances, to do the work you like and not to do work you do not like. You can envision the life you want, and make a plan to get there. Once you have done that, with specificity and clarity, the day-to-day decisions take on a new meaning. You can measure the decisions by whether they are working the plan.

In our case today, we were discussing an opportunity that had come up, which was exciting. We thought we had it about down. Then we had the conversation about long-term goals. At the end of that conversation, even though our discussion about long-term goals is only beginning, we could both see that we had missed an important part of the opportunity we thought we had thoroughly covered. The goal drove the opportunity, and by tweaking it a little we made the opportunity a better part of the long-term success.

Most entrepreneurs are very, very busy with what is happening right now. If it is not both important and urgent, it gets done tomorrow, not today. But taking time to think about what that dream exit looks like, or even what the dream company looks like, is time well spent. The time spent for that planning will pay you back in making those day-to-day decisions a little easier to make.

So clear some time and some head space for thinking about what the dream future looks like, and how you can reduce that to specific and measurable short and medium term goals. You will not regret the time.

About 12,000 years ago, human beings discovered that it was easier to farm than to hunt. Sure, they kept hunting, but they also began to settle down into villages, clear land and plant. This cleared land could be planted over and over, and kept giving new crops. This discovery led to civilization and life as we know it. If you are an entrepreneur or a professional, you should discover it again.

Every business needs customers. Every entrepreneur or professional is regularly looking for customers. Many of us do it the old-fashioned (as in 12,000 years ago) way – we hunt individual game. We spend our time and our marketing dollars seeking that individual who has a need we can fulfill. And we should do some of that – as my partner Allen Robinson says: “All we need is a payin’ gig”. But hunting each client, while rewarding, is a lot of work.

Farming is easier than hunting. Consider those clients for whom you have successfully completed a project as your cleared fields. Time spent cultivating those cleared fields is time well spent. How do you farm:

Stay out Front: Your customers are busy, and they are not thinking about you. You need to stay on their minds, so that it is easy to remember you and contact you when they have a need for you, or can refer someone to you. You can do this in many ways: a blog, a mailing list, an active Facebook business page. Take time to keep yourself on their minds.

Give Value. When getting yourself in front of your customers, don’t sell – give value. Helpful tips and advice are the best things to put in front of people. Often, someone will see your advice and it will be timely for them, and that will generate a phone call.

Make it Easy: Remember to put your contact info on any communication. Make it as easy as possible for people to contact you. Clickable links are best.

Use Tools: Blogs, newsletters and other social media tools allow you to contact many people with one effort. Neat tools like Nimble help you maintain meaningful contact with your customers. Farming is easier than hunting when you use tools to help you.

Target Feeders: Identify people who can send you business, and make sure you are regularly contacting them. Who is a trusted provider of goods or services that do not compete with yours, but have the same customer base? For John Emery’s local game store, it is the local independent bookseller. For Ralph Gleaton’s boutique business law firm, it is the local independent accounting firms. Make sure these feeders are on your contact list, and stay in front of them, with good content. I often offer to answer questions or give short pieces of advice for free to such feeders, because I want them to call me with their questions so that they will refer me their customers.

Like your ancestors 12,000 years ago, put your spear down for a minute, grab a hoe, and farm those successful contacts. The rewards are great. After all, it was when your ancestors starting farming that they invented beer . . . but that’s another story.

Every business has a competitive advantage – something that business does better, or tries to do better – than its competitors. Knowing what your competitive advantage is will drive your marketing and advertising efforts and give you actions an advantageous clarity. A framework I find helpful for thinking about competitive advantage is to divide those advantages into three general categories: Price, Service, and Quality. Whether you know it or not, you are competing by seeking competitive advantage in at least one, and perhaps two, of those areas. You can’t be competitive in all three, and you shouldn’t try to be.

Your particular competitive advantage should influence your marketing and advertising. Cadillac competes with Kia on Quality, and Kia competes with Cadillac on Price. A Cadillac commercial touting its low prices would miss the mark, as would a Kia commercial comparing its quality favorably with a Cadillac. Between Cadillac and Mercedes – who both compete primarily on Quality – there may be a competition on Service. If I owned a Mercedes dealership and I was competing for a sale with the local Cadillac dealer, I would emphasize my service as being better than theirs. Price is unlikely to be a primary factor for someone choosing between two premium brands.

I was in Publix the other day and saw an advertisement inside the store that struck a wrong chord with me. It was a standing poster that touted “Wal-Mart Doesn’t Always Have the Lowest Prices”, and compared a list of products where Publix purported to be less expensive that Wal-Mart. This, to me, was a good example not knowing what your competitive advantage is. Publix is the place where “it is a pleasure to shop”. The store is nicely laid out, bright and sparkling clean. The workers are friendly and helpful. I see the General Manager and he says hello to me almost every time I am there. The lines are kept short and move quickly. Service is Publix’s competitive advantage.

Wal-Mart is the low price leader. Even if Publix can beat Wal-Mart’s pricing on a few targeted items on any given day, overall your grocery bill will be lower at Wal-Mart. But shopping at Wal-Mart is not, in my experience, a “pleasure”. I shop at Wal-Mart from time to time, but the long check-out lines and lack of workers who can help me makes it a very different experience than shopping at my Publix. A Publix ad touting low prices compared to Wal-Mart is a clangy as a Wal-Mart ad saying ”Publix doesn’t always have the shortest check-out lines”, with a picture of a short line at one Wal-Mart check out stand from 3:30 AM on a Tuesday.[1] Emphasize your competitive advantage. A picture of a fifteen person deep line at Wal-Mart saying “Aren’t you glad you’re not there?” would have been a more effective comparison for Publix.

A business can compete on different planes with different competitors. A small law firm that concentrates on business law may compete with other small firms on Quality – we know business, and they are generalists, come to us for your business needs – but may compete with large law firms on Price or Service – we are good at business law too, but our prices are much more affordable for small companies, and we can turn your work around more quickly, or, with us, you can get a partner on the phone immediately, you are not going to be sloughed off to an associate.

For retail entrepreneurs competing with large companies, you are usually not competing on Price, and often not on Quality, if you are reselling the same items. My friend John Emery, who I have mentioned before, runs a game store. He sells the same games his customers can buy on the Internet, or sometimes at Wal-Mart, Barnes and Noble or Toys-R-Us. He cannot compete on Quality – the items are identical. He often cannot compete on Price either – MSRP is MSRP, and where there is a discount to the retailer for volume, he can’t buy the volume a big box can. John Emery has to compete on Service. The good news is, he knows it. He or one of his two co-owners are in the store most of the time, and they know games. The employees are carefully selected, well-trained, and the emphasis is on customer service. Want to know what a game might be like before you buy – good luck getting that information at Wal-Mart. But John and his staff can tell you. They can recommend games based on what you already enjoy. They will break a game open for you and teach it to you. They have tables in the back where you can sit and play for free. If they don’t have it in the store, they will try to find it and order it for you. They are competing on Service and they know it – and that is why they have been in business for 28 years.

As a small business owner or a small practice professional, it is critical to know what your competitive advantage is, and to gear not only your advertising and marketing but also your business culture around that advantage. Knowing your competitive advantage allows gives you a yardstick to measure everything by, and will help you to act intentionally to make your business a success.

[1] This is obviously a hypothetical. Check out lines at Wal-Mart are long even at 3:30AM on Tuesdays.

Last week, I attended a retirement party for my friend Bill Beckman. Bill is retiring from a career as a regional manager for an insurance company, but before that, Bill was a high school history teacher and a baseball coach. As long as I have known Bill (14 years) he has used baseball analogies to explain his business concepts. It is just how he sees life and the world.

We roasted Bill a little at his retirement party, and the surprise guest of honor was Bill’s son, Chuck – an executive at Coke Europe. Chuck told the story of a time when he was playing baseball for his dad, and the team, even though winning, gave up a run through a careless error. Bill, who can be emphatic, was not happy. He told the boys, in terms that caused his son to remember the event 25+ years later, that “Every Run is Precious”. And so they are. A careless error that gives up a run in the first inning seems like less of a big deal than the same run-giving error in the 9th, but it is not. If you lose 5-6, the run you gave up in the first was just as much a part of their 6 as the one you gave up in the ninth. Chuck told the group that not only did he remember that day vividly; he also used that lesson to guide him in his business and management success.

In business, “runs” are what wins the game – revenues are runs for your team, costs are runs against you. You win or lose each month or quarter or year depending on that critical final score.

As in baseball, every run – for you and against you – is precious. If you “loose the game”, the cost you carelessly incurred on the first day of the month is just as much a part of the score as the one you incurred on the last day of the month. The revenue you let slip away in January matters as much as that lost opportunity in December.

The real power of this analogy is in paying attention to the small things, and empowering your team. “Every Run is Precious” means that the person who can cut a small cost is as important to the overall success of the team as the person who can cut a large cost. You may have an awesome pitcher who mows the opposition down, and a golden gloved center fielder who can run like the wind, but if the 3rd Baseman boots an easy grounder and gives up a run, and you lose 5-6, that one error that gave up that one precious run mattered.

It’s ten o’clock. Closing time. You have just locked the door and turned off the “Open” sign, when a man dashes up and tries to open it. “I just want to buy a chess set” the man says, through the door. You are tired – it has been a long day and home is beckoning. “We’re Closed” you shout back through the door. The customer walks away, dejected. The sale is lost. The run not scored. Bill Beckman wants to shout at you “Every Run is Precious!”

Your business is a team, and everyone needs to have their head in the game. Every one on the team matters, because every run is precious. Chuck told me he uses the story and its lesson to motivate his team to seek cost cutting measure, no matter how small, and no matter who suggests them. “We are not going to lose 6-5”, Chuck tells them. You can use the story to motivate your team to open that door at ten o-clock, and sell that chess set. Because every run is precious, and teams that understand this win.

My über-smart friend Phil Yanov was giving advice to entrepreneurs the other day – about start-ups. Every founder will make at least three mistakes, Phil said, the key is to make those mistakes survivable. Fly three mistakes high.

Flying three mistakes high is an aviation term. When a pilot makes a mistake while flying, the plane looses altitude while the pilot corrects the error. A pilot should, the adage goes, fly high enough to make and correct three mistakes before he runs out of sky and hits the ground.[1]

How high is three mistakes high? That depends on the pilot and the aircraft. Experienced pilots correct mistakes more quickly and loose less altitude per mistake. Some aircraft glide better than others. Knowing how high “three mistakes high” is, for you, is the trick of it.

How does this apply to start-ups? Start-up mistakes cost time and money. And, since time = money, all mistakes cost money. What kinds of mistakes to start-up entrepreneurs make? Let me count the ways:

Hire the wrong person, or don’t hire the right one.

Hire too many people, or not enough people.

Rent the wrong location, or rent the right one for too much rent, or for not a long enough term, or for too long a term.

Buy too much equipment, or don’t buy enough.

Set prices too low, or too high.

Open for the wrong hours.

Buy the wrong inventory, or too much of the right inventory.

Pay too much or anything, or even for everything.

Partner with the wrong person.

Pay too much attention to the business, and not enough to developing relationships with customers.[2]

If all entrepreneurs are going to make three mistakes, and if each mistake is going to cost you time and money, then you fly three mistakes high by limiting your initial bets to bets that you can loose and survive. In other words, early on it’s important to limit your exposure on any decision to something survivable if you are wrong.

How high is three mistakes high for you? That depends on how well attuned you are to your business. Collecting data, and performing analysis on that data, can give you a clue that something you are doing is not working. The sooner you catch a mistake, the less it costs – the less altitude you loose. More experienced businessmen, like more experienced pilots, should loose less altitude per mistake because they will catch and correct the mistake sooner.

For example, I once hired the wrong person.[3] The worker took too much time off, always had some malady, and asked to borrow money for emergency after emergency. The stories were tear-jerking. The reasons were compelling. The worker was getting nothing done, and my business was paying and paying. We continued to pay the worker for days taken off long after all sick leave and vacation were exhausted. Finally, I had enough and terminated the worker. Months later, I heard from an acquaintance that had hired this worker after me. He has kept the worker on much longer, and had been sucked into loaning money he would never get back. We both made the same mistake – we hired the wrong person. But he lost more altitude (money) than I did, because he did not catch and correct the problem as quickly.

Businesses, like aircraft, also effect how high “three mistakes high” is for you. A mistake that interrupts the productivity of a capital and labor-intensive business may cost a great deal of money per day or even per hour. Make a mistake running that business and you had better catch it quickly.[4] Other businesses may only burn capital slowly, and can glide along without loosing too much cash even as the entrepreneur corrects errors. Knowing how well your business can handle mistakes is important.

Finally, in order to fly “three mistakes high”, you need to know your altitude in the first place. How much time and money do you have? Undercapitalization is one of the most common reasons small business start-ups fail. Having the capability of “flying three mistakes high” begins in the pre-start up planning phase. Successful start-ups plan for mistakes, and try to make sure they have access to capital to fly through the mistakes, and into the blue skies beyond.

[1] Another adage says “It’s not the fall that hurts, so much as the sudden stop at the bottom.”

[2] The guy who is in the back baking the cookies, and not out front creating a great customer experience, for example.

In Part V of Creating Business Value Now, I want to talk to the superhero entrepreneur in you and tell you that, while it is impressive and admirable that you do it all, if you want to sell your business for real value, you must be replaced.

Replace Yourself. When you offer your business for sale to that future buyer, the idea (generally) is for you to go and do something else – retire, relax, start a new business, etc. But if you ARE the business, then how much value does the business have without you. Entrepreneurs are generally highly motivated, strong performers. It is sometimes easier for them to do it all than to train people to do it for them. But if you want to have value for sale, the business needs to be able to operate and sustain with you gone.

Entrepreneurs who fail this test often find their purchase offers conditioned on long-term employment or consulting agreements. This does not often work out well in the small business arena. The Seller continues to think of the company as his, and the new owners have a difficult time making the company theirs while the old owner is hanging around.

Buyers who see too much value in a selling entrepreneur’s personal work in the company, but who aren’t very excited about the seller hanging around, will also make an “earn-out” offer, where the final purchase price is substantially determined by the actual performance of the company after the sale. If the business is going to flounder when you’re gone, you value is in real jeopardy.

I realize that all business, especially small business, is at its core about personal relationships, and the key advantage a small business has over its large competitors is the ability of the entrepreneur to forge relationships with his customers. So, I am not advocating you become an absentee landlord. But you should train employees to perform the work of the business, while you focus on relationship building and strategy. When the buying entrepreneur steps in, the core business can continue to function, and the new entrepreneur will take over the relationship building.